Washington, April 4, 1997 (RFE/RL) - The largest international organization of private banks, securities firms, and insurance companies says that national regulators of financial institutions must find ways to share information and coordinate their supervisory activities because they are falling behind the globalized world economy.
The Washington-based Institute of International Finance (IIF) says in a report released Thursday that cross-border financial transactions by globally active firms are an integral part of the increased flows of goods and services that are moving around the world.
But regulation of banks, securities markets and insurance companies is handled on a country by country basis according to the laws of each. Most nations in addition segment the regulation of each of these parts into separate bodies -- a bank regulatory agency, a stock market and securities oversight body, and an agency which regulates insurance policies. In the United States, insurance companies are even further segmented by the fact that most regulation is at the state level, not the federal.
However, says Charles Dallara, Managing Director of the IIF, a growing number of major firms are already working on a global basis, often far from the view of the government agency which regulates it.
"Markets are being globalized, risk management is being globalized and if supervisory structures are not also globalized over time, we're going to have problems because the supervisory arrangements will be inadequate," he says.
The institute's deputy managing director John Haseltine says the problem at the moment involves only about 100 of the largest financial firms working on a global basis and can be dealt with on a cooperative basis among national authorities. He says the institute does not believe it is necessary or even wise to think of some international supervisory agency.
He says many of the firms active globally now say they find that "regulators in different countries have interesting different slants on the same issue and that while some are more responsive than others, it also allows more flexibility and responsiveness."
The study, drawn up by a group of financial firm members of the institute, including the Czech Republic's Ceskoslovenska Obchodni Banka, recommends that supervising agencies consider establishing a special arrangement among themselves to develop guidelines.
They should first focus on collecting information on common risks present in financial business and learn a new "risk-based supervisory" style of handling these global companies.
The institute also urged the financial firms themselves to publicly disclose more information on how they manage risk and how their various branches, divisions and affiliates around the work balance out globally.
Dallara says the report itself does not directly impact on the countries of East and Central Europe and the former Soviet Union, in various stages of transition to market economies, because almost no truly global firms are headquartered there yet.
But he says the topic is one these nations should consider carefully as they now craft their own domestic financial regulatory systems. They can, he says, avoid the pitfalls of the out-dated systems now in effect in most major western nations and put themselves a step ahead going into the global economy.
For the Central European countries anticipating joining the European Union before too long, Dallar says paying attention to these issues is especially important.
Dallara says the need for international cooperation in supervising financial institutions will be addressed at this summer's summit of G-7 major industrial nations and Russia. The institute's report will be a part of that discussion.